Why Small Data May Be Bigger Than Big Data

Victor Ho is the CEO and Co-Founder of FiveStars, a venture-backed startup building the first loyalty automation platform for local businesses. Previously, he was a consultant at McKinsey & Co. in New York, where he helped multiple Fortune 500 companies build and manage their loyalty and customer retention programs. Victor holds three degrees from the University of California, Berkeley, and is a Rubik?s cube enthusiast with a personal best of 45 seconds.

In start-up land, the hot buzzword is Big Data--those massive data sets that can't be handled with traditional database tools. The promise is that businesses can capture, curate, and synthesize big data to enable personalization in e-commerce, smarter business decisions, and greater efficiency.

In the world of local businesses, we're not talking about big data. Instead we're dealing with Small Data.

Make no mistake, small does not mean insignificant. Think of it this way: If we leveraged data in local the same way large e-commerce companies do, we could have a greater impact on commerce than Big Data, since more than 90 percent of retail transactions still occur offline in local businesses. But most of us don’t. The reality is that most local businesses haven’t figured out how to capture or use this data to grow profits. So how do we solve the "data divide" for local businesses?

If you are an e-commerce company, it’s a straightforward exercise to use Google Analytics to see how many customers are visiting your website daily, how many are repeat visitors, and how long they spend on your site. But if you're a local business with a physical store, it’s a lot harder. Large multi-store chains can hire people to count traffic by hand or leverage new technologies that use cameras or mobile phone signals to estimate traffic, but smaller local businesses have been left out--until recently.

Forget paper punch cards for repeat visitors. Today’s cards are digital and link to your customer database. Modern loyalty programs--enabled by technology called loyalty automation--do at least three things in the area of data: capture identity, connect identity to activity, and drive personalization. That’s exactly what big businesses have been doing for years. Here’s how it works.

Capture Identity. In the world of paper punch cards, you could drive loyalty, but you couldn't capture identity. You didn't know which people were coming to your store each month. With modern loyalty programs, local businesses can finally connect a store visitor with a real person's identity, since at signup, their identity is registered in a database that’s integrated with their point-of-sale. Then when they come back to the store with their loyalty card, businesses know their name.

Connect Identity to Activity. Since customers are no longer anonymous visitors and bring their identity with them, local businesses can now connect customers to specific activity--whether that's visiting their store frequently or purchasing particular products.

Drive Personalization. Because they now know which customers come frequently, which ones have stopped coming, and which ones prefer particular items, businesses can customize their treatment of these customers. They can make their best customers even more loyal by treating them as such and win back the ones who have stopped coming.

One great example is The Real Deli, a small deli store in Dana Point, California, which leverages data and tools from its modern loyalty program to figure out who visits frequently and regularly opens their emails. They call these customers “super fans,” since they can be The Real Deli’s greatest word-of-mouth advocates. They give them special offers and VIP treatment and rely on them to spread the word about their business. This simple tactic of matching store visits with email activity--something e-commerce companies do on a regular basis--had previously been impossible for local businesses.

The Real Deli may have crossed the data divide. If other local businesses can join, the potential gains in personalization, sales, and efficiency with Small Data could be just as staggering as that of Big Data.

The opinions expressed here by Inc.com columnists are their own, not those of Inc.com.